Is it really a good idea to borrow from your 401(k)?

This depends on the situation that has come up; however, taking a personal loan can be more beneficial to your credit rating in the long run. There are many circumstances in life that come up where we need some extra cash to help through a financial situation and using your 401k is a good option for obtaining this money, but this option does not affect your credit score.

In most cases, you can only use your borrowed 401k funds for medical bills, education, or the purchase of a home. If you are taking out a loan in the first place, then it may be a wiser decision to borrow the funds from a lending institution and use this advance in your favor to increase your credit a score. There are many advantages in using your 401k; however you are borrowing from yourself and are missing out on an opportunity to improve your credit rating and borrowing capabilities for future loans.

If you have the choice between your 401k and a lending institution, leave your 401k alone. There are some factors that can hurt your retirement fund if you do not pay back the 401k loan, or move on to a different employer before you have paid off your 401k loan. If you do not pay off your 401k then you are subject to extra taxes and early withdrawal penalties. If you move on to a different job then you must pay back your 401k loan or face the same consequences.

By borrowing from a lending institution, you are leaving your retirement savings alone and not risking paying fees and taxes. In both cases you will have to pay interest on the loan, but a personal loan from an institution avoids the fees and taxes as long as you are making your payments on time.

One idea that you may want to consider is using a loan against your 401k to pay off existing loans or future loans. Use the opportunity to borrow from a bank and then if you have the option to pay off the loan early, use your 401k to pay off the balance. This improves your credit score and will you the benefit of a cheaper interest rate from your 401k loan.

Be aware that in most cases if you borrow against your 401k, the payment will be directly withdrawn from your paycheck. If you have a lot of automatic online payments from your paycheck, be sure to account the lack of that money in your account on a monthly basis.

All In all, use your ability to obtain a loan from a financial institution to increase your credit score and leave your 401k alone.